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Wednesday, April 29, 2009

The End of the Maintenance Endgame

When Marc Benioff (Salesforce CEO) calls for the end of maintenance payments (ComputerWorld, PCWorld), he obviously wants to draw attention to one of the apparent advantages of the Software-as-a-Service (SaaS) model of software consumption.

As Judith Hurwitz points out, this advantage is more apparent than real. SaaS vendors like Salesforce still need to maintain their software assets, and to pass the costs of this maintenance to their customers, one way or another.

A significant fraction of software maintenance is required simply to keep up with the latest platforms and standards without delivering any new features or other innovation, and this is especially true for companies that have large portfolios of fragmented software assets.

Companies that fail to innovate may still retain a high percentage of their customers, at least in the short term, because of the high switching costs. This is not just a factor with traditional software products, but can be true of SaaS as well.

One key differentiator here is not between SaaS and more traditional software delivery and pricing, but between software companies that maintain their software assets intelligently and effectively and those that don't. Another key differentiator is between products and services with high switching costs (vendor lock-in) and those with very low switching costs (open market).

As Judith also points out, "many software companies have become increasingly dependent on maintenance revenue to keep revenue growing". In addition, there has been a trend in the software industry of companies acquiring mature software products in order to milk the maintenance revenues, with no real intention of innovation. (See my post on Innovation or Refinement.) This can be regarded as similar to securitization - treating a software product as a financial product, based on its expected income stream.

To the extent that open market SaaS exists, this represents a major challenge to this endgame, and this could possibly mean much quicker termination of declining products and services. But only a chess player would dare to predict how this will play out over time.